House, Senate dicker over 'reasonable comp'

Published: April 7, 2011

The House and Senate have each approved bills that would make it easier for small-business owners to deduct their own compensation, enabling them to avoid paying much, if not all, of the business profits tax. But the devil, as it has always been, is in the details.Both the House and Senate bills put the burden on the state Department of Revenue Administration to prove that a business owner is taking unreasonable compensation -- that is, paying himself a large income to avoid paying the BPT. The DRA has stepped up audits in recent years in search of such compensation, handing out new and larger tax bills to many businesses -- and daring the audits to be challenged in court."The state has come to the business sector saying, 'You are guilty into proven innocent,'" said Chris Williams, president of the Greater Nashua Chamber of Commerce in testifying for House Bill 557 at a Tuesday hearing of the Senate Ways and Means Committee.But HB 557 differs from the Senate's bill, SB 125 in some important ways, according to Rep. Frank Sapareto, R-Derry, prime sponsor of the House measure.For one, it has a $50,000 "safe harbor," which essentially means the DRA couldn't touch the first $50,000 of an individual's reasonable compensation if the person actually provided services to the business.Second, it offers the federal standard on tax compensation as an example, meaning the DRA would - lacking any reason to do the alternative - accept federal rules on the matter. And it does keep, to some degree, the requirement that businesses keep paperwork -- something the Senate bill does away with theThe Senate's bill contains fewer details and simply says that DRA bears the burden of proving that compensation is unreasonable.On Tuesday, there was some talk of some minor amendments, such as changing "grossly excessive" to "clearly unreasonable," and making it clear that all those claiming an exemption would have to be actively contributing to the business, and perhaps applying that $50,000 exemption to each business owner, not to the whole institution.When asked by Senate Ways and Means Chair Bob Odell, R-Lempster, how strongly the House felt about these various details, Sapareto seemed to be willing to compromise, as long as that compromise became law.But not everybody in the room was happy about that prospect.Robert Walsh, a former representative and a certified public account from Manchester, complained that it was unfair to small businesses who opted to organize as an S corporation - as opposed to an LLC or other partnership -- because they wouldn't be able to claim such a deduction. And the Granite State Fair Tax Coalition worried about the fiscal note, which said that the cost to the treasury could be as much as $50 million.More businesses pay property taxes than the BPT, testified the coalition's executive director, Cathy Silber, so the loss of BPT revenue would result in a downshift to towns by and an increase in property taxes, as well as cuts to the "infrastructure on which business depends."However, conservatives have been skeptical about DRA's numbers, emphasizing that it is unrealistic to expect that it would lose every cent that it gained in its audits. There are some business owners who really are armchair investors in an LLC and can't legitimately claim compensation, and would still have to pay the tax, they argue.Meanwhile, the Senate is considering another tax break passed by the House, extending from five years to 10 the business enterprise tax credit against the BPT.This would help out larger businesses (those with a lot of employees, since the BET is on wages, interest and dividends paid out) that have not been able to fully deduct the BET because they haven't made enough profits to have a large enough BPT to deduct against -- an all-too-common situation during the recession.BAE Systems -- one of the state's biggest employers, with some 4,600 workers -- was the only one to weigh in on the measure, which would prevent the deduction from expiring, easing the tax burden on struggling businesses.How much would this bill cost the state? The DRA didn't offer a number. -- BOB SANDERS/NEW HAMPSHIRE BUSINESS REVIEW

This article appears in the March 25 2011 issue of New Hampshire Business Review